Factor-Based Investing in Mutual Funds – A Smarter Way to Invest

What Is Factor-Based Investing?

Factor-based investing involves choosing stocks based on quantifiable characteristics (called factors) that have historically delivered higher returns or lower risk.

Common Factors in Mutual Funds:

• Value: Cheap vs. intrinsic value (e.g., low P/E stocks)
• Momentum: Recent winners keep winning (price strength)
• Quality: Strong earnings, low debt, high ROE
• Low Volatility: Stocks with stable price movement
• Size: Smaller companies with growth potential

Instead of tracking the market blindly, these funds systematically screen stocks using such factors and build portfolios that aim to outperform regular index funds or reduce volatility.

Real-Life Example: Arjun vs. Neha

• Arjun invests in a regular large-cap fund that mirrors the Sensex.
• Neha, a data-savvy investor, chooses a factor-based mutual fund focused on Quality + Momentum.

• Arjun earns a decent 10.5% CAGR, but his fund lags in volatile markets.
• Neha earns 13.2% CAGR with less portfolio churn, and her fund automatically adjusts based on factor strength.

Why Factor-Based Mutual Funds Are Gaining Popularity 

Evidence-backed investing

Better risk-adjusted returns

Ideal for medium to long-term investors

However, not all factors work in all markets. Returns may vary across cycles.

Conclusion

Factor-based investing blends logic, data, and discipline — helping you invest with a purpose, not emotion. With more AMCs offering factor-based funds in India, it’s time investors explored this smart approach.

Want to invest like the pros? Start with a factor mutual fund that matches your risk appetite and long-term goals today.

Summary Table: Factor-Based Mutual Funds at a Glance